Friday 31 October 2008 20.01 EDT
First published on Friday 31 October 2008 20.01 EDT

New Labour thrived on good times and bull markets. The culture of easy credit and consumerism disguised its evasions of class and power. Now the markets are in freefall, and its ideological failings are brutally exposed. In the manors and town houses of the super-rich those who have brought about the calamity harbour their wealth. They are untouchable and unaccountable. Their tax havens are sacrosanct. Corfu reveals how our political elites, seduced by their opulence and power, do business with them. This is not just an economic crisis, it is a crisis of democracy.

Collective political action and the power of citizenship have been traded in for the ownership society, in which all were assured a small piece of the capitalist dream. In reality it has led to economic bust. House prices are heading for a 35% decline, repossessions are climbing and 2 million homeowners will find themselves in negative equity. The jobseeker's allowance count rose last month to 939,900. By Christmas unemployment could hit 2 million. The celebrated property-owning democracy looks increasingly brittle.

The stakes are high. Who will pay for this recession - capital or labour? The Labour party must reinvent itself for this battle. It did so in the 1990s; it can do so again by reconnecting to its traditional constituencies and creating new cross-class alliances. There are no easy solutions, but the goal is simple: a fundamental transfer of wealth and power back to the people. This will help stop the deflationary spiral and lay the foundations for a more just, sustainable and equal society in the future.

We need urgent action to address the housing crisis, which is replicating that in banking. Private housebuilders ensured long-term price inflation and profits by banking land and maintaining excess demand for homes, and profitability rose as the state withdrew from social housing supply. The outcome has been barely 150,000 homes built per year. This year it will be half that, against a planned 250,000. Meanwhile, there are an extra 220,000 family units a year in need of housing. About 1.75 million are on allocation and transfer lists. This is market failure on a grand scale.

Yet the government colluded in this social disaster. Undersupply ensured inflation and speculation fuelled the good times. But now, as prices fall, there are unprecedented levels of personal debt while toxic mortgage-backed credit derivatives menace the financial system.

Building firms are teetering on the brink, as land bank values collapse and cancellation rates hit 40%. The state must step in with an emergency public-sector housebuilding strategy, and if necessary, take a stake in some housebuilders to revive the sector. Local government must be re-empowered to fill the space vacated by the private sector.

The relationship between market and state is being redrawn. Nowhere is this more needed than in housing. This is where the battle lines are being drawn up. The left must create a democratic and accountable state capable of strategic intervention in the domestic economy and creating global alliances. A new settlement means a progressive tax system, a restructured financial economy and a Green New Deal. Ahead lie the perils of global warming and peak oil. But now let us give homes to people, and with them the hope of a better life.

Jon Cruddas is Labour MP for Dagenham; Jonathan Rutherford is editor of Soundings journal. Cruddas joins Harriet Harman, Chuka Umunna and Jeremy Gilbert to debate After New Labour - the second in the Who Owns the Progressive Future? series, organised by Comment is free and Soundings - at Kings Place, London, on Monday at 7pm. For tickets at a special rate of £5.75 phone 0844 264 0321 and quote "Guardian reader offer"